Quick Links

The International Trade Commission and the Failure of U.S. Trade Policy

The WTO is a supranational agency established in 1995 to prevent nations from adopting trade policies that give their domestic industries an advantage over foreign rivals. It can declare national legislation “illegal,” if it harms foreign interests. Archives around the world are filled with treaties and other documents that no longer hold sway because they no longer describe reality or fit the needs of major powers. The WTO needs to go into that pile. Then American statesmen can go back to the “protectionist” policies of national development that from its founding built the U.S. into the powerhouse of the 20th century, so it can remain on top during the 21st.

By William R. Hawkins | June 8, 2016

The U.S. International Trade Commission has released its assessment of the impact on the American economy of the Trans-Pacific Partnership (TPP) agreement. As expected, the ITC concluded that the net effect would be positive if TPP was implemented. Such reports must be greeted with skepticism given their track record. It should be remembered that the ITC predicted the U.S.-South Korean Free Trade Agreement would reduce the American trade deficit by boosting exports. What has really happened since it was adopted in 2012 is that the deficit with the ROK has nearly doubled; from $16.6 billion to $28.3 billion in 2015, with U.S. exports barely moving while Korean exports have surged. And when the U.S. agreed to allow China to join the World Trade Organization, locking in dramatically lower tariffs, the ITC said it would have hardly any effect on the U.S.-China trade balance. Yet, again, the outcome was tragically different. Since 2001, the trade deficit with Beijing has exploded from $83.1 billion (bad enough) to $365.7 billion last year – a flow that has had dangerous strategic as well as dire economic consequences.

The ITC’s computer models always show that liberalized trade will be beneficial because those models reflect airy economic theory, not real world competition. Having taught economic theory earlier in my career, I can attest that philosophy and wishful thinking play a very large role. The assumptions from classical liberal ideology is that trade is about cooperation and peaceful relations among those engaged in commerce. Everyone does what they do best and then exchanges their surplus for the output of those who are experts in other fields. This is what individuals do in their private lives, and the theory is that the entire global economy is made up only of such individuals. That people live in national communities and that the success or failure of those communities determine the opportunities available to their citizens, as well as their security in a world that is far from peaceful, is skipped over by the liberal philosophers except to denounce such “nationalist” concerns. Indeed, there has been a push to substitute the word “global” for “international” to reflect how merchants want to think of the world as opposed to how citizens and statesmen need to think about reality.

The purpose of “free trade” is to remove “nationalist” concerns and create a world run by and for merchants and corporations. Governments, which are instituted to safeguard society, are to be removed from the scene. That is the aim of agreements based on the “free trade” idea as opposed to the older diplomatic practice of negotiating agreements that give national producers and workers an advantage against rivals elsewhere. The public expects trade talks to be based on this second principle, and politicians will claim this is the case. But in fact, recent agreements have actually been premised on the first liberal notion, driven by those in the business community who acknowledge no allegiances beyond their own boardrooms.

The ITC thus finds itself charged by Congress to justify on national grounds agreements that have been made to advance private interests in order to gain their political acceptance in a democracy. In the case of TPP, the ITC’s best effort has not generated a very persuasive argument. Overall, the ITC projects that by 2032, the TPP will increase U.S. exports to the world by $27.2 billion but U.S. imports will increase by even more, $48.9 billion. Thus, with the TPP, the U.S. overall trade deficit will increase by $21.7 billion. While agriculture and financial service sectors will gain, manufacturing will continue to decline to the benefit of foreign rivals. The industries with the largest losses by 2032 are projected to be electronic equipment (output down $3.7 billion per year); metals and metal products (down $3.6 billion) chemicals (down $2.8 billion); machinery and equipment (down $1.7 billion); auto parts (down $1.4 billion) and medical equipment (down $641 million).

The ITC report also shows passenger car imports rising by $2.3 billion, while exports increase by only $2.0 billion. Digging deeper, the ITC claims auto exports to TPP countries will actually go up by $2.9 billion, but the U.S. will see exports drop to non-TPP countries. Here the argument is that TPP helps offset other losses, but will not eliminate negative trends. The auto numbers are suspect because Japan is part of TPP and will compete vigorously to dominate the vehicle market.

Despite concluding that the trade deficit will worsen over the next 15 and 30 year periods, the ITC still claims that U.S. incomes will rise more with TPP in the equation than without it. This is based on the idea that TPP will partially offset the mistakes made in previous trade decisions; decisions the ITC had predicted would be successful. So how can its judgement be trusted now?

But even if accepted at face value, the predicted gain over a 30 year period is less than the gain in even a slow month in the domestic economy. According to the ITC, by 2032 there would be 128,000 more full time jobs in the U.S. economy due to TPP, and 174,000 by 2047. According to the Department of Labor, the U.S. economy gained 160,000 non-farm jobs in April of this year, and that was a slow month (down 48,000 from March). So, even an optimistic projection by the ITC leaves one wondering whether the hype given to global trade really means anything.

If seven years (2008-2015) of trade negotiations with 11 other countries accounting for over one-third of the world economy yields fewer jobs over a 15 or 30 year period than one month of domestic growth, perhaps American policymakers should concentrate more on boosting domestic growth than pursuing expanded foreign trade.

The recovery from the Great Recession of 2007-2009 has been the slowest from any downturn since 1945. In April, industry was still operating at only 75.4% of capacity. And the labor force participation rate has not recovered at all, which means the “official” unemployment rate badly understates the problem of joblessness which polls show is a top concern of the public. Real wages are lower today than forty years ago. One third of Millennials (aged 18-34) are still living at home because they cannot find jobs that can support independent living. And the May jobs report from the Labor Department indicates that even this sluggish recovery is stalling out.

President Barack Obama tried to speed up the recovery through trade policy, claiming he would double U.S. exports in five years. Yet, from 2008 to 2015, exports only increased by $217 billion, or 17%, while imports increased by $137 billion wiping out even most of those modest gains. So, looking overseas for substantial results has not worked. The strength of the United States is at home; it is the one market and economic system under our control – and which directly puts Americans to work. Policymakers have not paid enough attention to reforming and rebuilding the domestic economy, and the trade delusion has been a major part of that blindness. How else can a trade deficit of $736 billion last year be explained? A staggering amount that measures how much American money is being used to support jobs and production overseas rather than here at home.

Jobs will come home when the money stays home, to fund incomes and investment. TPP is irrelevant. The popular backlash that makes its Congressional adoption doubtful is fueled by the failure of past trade policy based on the sophistry of “free trade.” A March 2016 Bloomberg poll found “Opposition to free trade is a unifying concept even in a deeply divided electorate, with almost two-thirds of Americans favoring more restrictions on imported goods instead of fewer. The latest Bloomberg Politics national poll shows the issue unites the country like few others, across lines of politics, race, gender, education, and income.” No wonder all three remaining presidential aspirants – Trump, Clinton and Sanders, oppose TPP.

But it is the past arrangements that need to be undone, especially the World Trade Organization. The WTO is a supranational agency established in 1995 to prevent nations from adopting trade policies that give their domestic industries an advantage over foreign rivals. It can declare national legislation “illegal,” if it harms foreign interests. TPP seeks to expand this assault on sovereignty by giving corporations increased “rights” to sue governments for getting in their way. Such a “rule of law” is inherently illegitimate as it leaves the U.S. open and vulnerable to commercial assault from afar and betrayal at home by “transnational” business elites with fluid identities no longer determined by natural ties to society.

Archives around the world are filled with treaties and other documents that no longer hold sway because they no longer describe reality or fit the needs of major powers. The WTO needs to go into that pile. Then American statesmen can go back to the “protectionist” policies of national development that from its founding built the U.S. into the powerhouse of the 20th century, so it can remain on top during the 21st.

William R. Hawkins, a former economics professor and Congressional staffer, is a consultant specializing in international economics and national security issues. He is a contributor to SFPPR News & Analysis.